Reassurance in a Shaken Market. (Insurance Update).

Among all of the tragic consequences of the Sept. 11 attacks is the fact that the enormous loss of lives, businesses and property will seriously disrupt world insurance markets. Estimates of insured losses range from $40 billion to $60 billion--an amount that will eclipse anything the insurance market has ever seen.

The losses will severely impact many insurers' surplus. And surplus--or retained earnings--is a major component of an insurance company's health. The losses may seriously weaken some large and well-known insurers. The main rating agency for the insurance industry, A.M. Best Co., already has downgraded a number of insurers and reinsurers.

SPREADING THE LOSS

Insurance companies will spread their losses through their reinsurance contracts. However, the magnitude will test the claims-paying ability of reinsurers who already have been weakened by prior losses and 10 years of soft-market price competition. Industry-wide reductions in surplus will reduce the risk that insurers can underwrite, causing restrictions in coverage availability, including professional liability insurance.

Combined with the economic downturn and unpredictable investment income, a hard market is certain to develop. While it is still too early to predict the degree to which prices will rise and availability will contract, there undoubtedly will be some instability in the marketplace.

PROFESSIONAL LIABILITY MARKET

Several insurance companies that sell professional liability policies to CPA firms write multiple lines of insurance and had significant exposure to the Sept. 11 disasters. Direct losses include claims under property coverage, workers' comp, life and accident, business interruption, general liability and more.

Premiums for the types of insurance directly impacted by the disasters will increase the most, but increases in all lines of insurance are likely as companies try to raise funds to compensate for claims.

Some reinsurers may have trouble paying primary insurers' claims. Recently, failure of reinsurers to pay claims led to the demise of a primary insurer (Reliance Insurance Co.), and the Sept. 11 disasters could produce more of the same. There is no way to tell which reinsurers are behind which companies, and to what degree companies use reinsurance, but every large insurer and reinsurer was impacted to some degree and will raise prices.

HOW IS CAMICO IMPACTED?

CAMICO remains a strong, stable insurer, specializing in professional liability insurance to CPAs only. That means we have no significant exposure as a result of the disaster and do not expect to see any contraction of our surplus or capacity.

We always have followed a conservative philosophy with respect to buying reinsurance from top-rated companies only. We are a desirable program to reinsurers because we are well-run, profitable and have exposures limited to the CPA profession. We already have received commitments from our reinsurers that CAMICO has adequate capacity and reasonable rates for 2002.

STAYING INSURED

It's tempting to practice without professional liability insurance during hard markets, but there are a number of reasons not to "go bare":

* No CPA firm is immune from liability claims. A firm does not have to be at fault to become the focus of a malpractice claim. Clients suffering economic setbacks all too often seek to recoup their losses from their CPAs, especially during economic hard times. On average, all CPAs will have at least one claim made against them in their career. Furthermore, professional services are performed by humans, and humans make mistakes.

* Your firm's economic viability may well depend on its coverage. Average claims costs for tax engagements have gone up from a 14-year average of $70,000 to $105,000 in 2000. Tax claims are our least expensive by engagement type, but they represent 57 percent of all claims. The 14-year average for audit engagement claims is $341,000, and audit claims involving creditor decisions now average $668,000.

* Malpractice claims tend to be expensive to litigate. A good professional liability program will cover the legal expenses and also provide skilled defense attorneys who specialize in CPA liability and can limit the damage done to practices and reputations. Good programs also provide CPA firms with proactive loss prevention techniques to avoid legal hassles and lost billable hours.

John A. Dodsworth, CPA, has been president and director of CAMICO since its inception in 1986. He is the 2001 recipient of CalCPA's Distinguished Service Award. You can reach him at [phone], ext. 2505 or [e-mail].